Q1 2023 Walmart Inc Earnings Call
Greetings welcome to Walmart's fiscal year, 2023 first quarter earnings call.
At this time, all participants are in listen only mode.
A question and answer session will follow the formal presentation.
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Please note this conference is being recorded.
I'll now turn the conference over to Dan vendor Senior Vice President Investor Relations, Dan you may begin.
Thank you Rob.
Good morning, and welcome to Walmart's first quarter fiscal 2023 earnings call I'm joined by members of our executive team, including Doug Mcmillon, Walmart's, President and CEO , Brett Biggs Executive Vice President and Chief Financial Officer, John Furner, President and CEO of Walmart U S. Judith Mckenna, President and CEO of Walmart.
<unk> and Catherine Clay, President and CEO of Sams club.
In a few moments, Doug and Brett will provide you an update on the business and discuss first quarter results that will be followed by a question and answer session.
Before I turn the call over to Doug Let me remind you that today's call is being recorded and will include forward looking statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially from these statements.
These risks and uncertainties include but are not limited to the factors identified in our filings with the SEC.
Please review our press release and accompanying slide presentation for a cautionary statement regarding forward looking statements as well as our entire safe Harbor statement and non-GAAP reconciliations on our website at stock Dot Walmart Dot com. It is now my pleasure to turn the call over to Doug Mcmillon.
Good morning, Thank you for joining us to hear about our results we had a good quarter from a top line point of view sales for the period were ahead of what we expected across all segments and we're pleased with the momentum we see so far in Q2.
Bottomline was below our expectations due primarily to three areas that negatively affected operating income in our U S businesses, both in Walmart and Sam's club.
Each of these items represents about a third of our overall profit Miss.
The first item is wage expense as the omicron variant case count declined rapidly in the first half of the quarter more of our associates that were out on Covid leave came back to work faster than we expected we.
We hired more associates at the end of last year to cover for those on leap. So we ended up with weeks of Overstaffing.
That issue was resolved during the quarter primarily through attrition.
The second item relates to our general merchandise inventory levels, primarily in Walmart U S.
G M was a lower percentage of total sales in Q1, resulting in an unfavorable gross margin mix.
We also had higher costs for containers and storage and we've taken and are taking steps to contain those cost pressures to the first half of this year.
The third item is related to fuel costs in our supply chain.
So those are the three items that now share more detail on each to help provide clarity.
As for wages and staffing in the U S. We had nearly all associates on Covid leave return in February we expected the omicron curve to be steep on the backside, but given that we needed more associates to cover in January . It just took some time over March and April to get wage costs in line with sales. We're now staffed in a way that supports our.
Top line performance.
As it relates to Walmart U S. General merchandize sales, we knew that we were up against stimulus dollars from last year, but the rate of inflation in food pulled more dollars away from G. M than we expected as customers needed to pay for the inflation in food.
We like the fact that our inventory is up because so much of it is needed to be in stock on our side counters, but a 32% increase is higher than we want.
We will work through most or all of the excess inventory over the next couple of quarters.
We started being aggressive with rollbacks and apparel for example, during Q1, even with reduced prices. The apparel margin can still be helpful to our overall mix.
As we manage the quarter, we generally pass on cost increases from suppliers that the category cost of goods level, but fuel costs accelerated during the quarter faster than we were able to pass them through creating a timing issue.
Fuel ran over $160 million higher for the quarter in the U S than we forecasted.
We made progress matching pricing to the increased cost as the quarter progressed.
And while we expect some gross margin pressure in Q2, we expect an improvement over Q1.
We're not happy with the profit performance for the quarter and we've taken action, especially in the latter part of the quarter on cost negotiations staffing levels and pricing, while also managing our price gaps.
While we've experienced high levels of inflation in our international markets over the years U S inflation being this high and moving so quickly both in food and general merchandise is unusual we.
We will control, what we can control reduce our inventory level and keep prices as low as we can especially on opening price point food items, while improving our profit performance.
Inflation is playing a role in the top and bottom line and the pace of change created a timing issue for us in Q1 were adjusting to the mix change and operational cost improvements.
Fortunately, we expect the solid topline performance to continue and we're taking up sales guidance for the year cut.
Customers and members are coming to us for value.
I'd like to highlight our international team and their performance, we had strong top line performance and manage the quarter very well across the markets. Our biggest international pressure point is related to the Covid lockdowns in China, which created operational and financial pressure.
Our teams did a great job of pivoting to serve customers and members through delivery. They stepped up in stores and clubs closed end demand for delivery spiked.
Overall, the international segment had another good quarter.
We're making progress executing our strategy. The flywheel, we're building is better for customers and members and a more diversified approach profitability is making the company stronger for.
We're excited about our newer businesses and our plans to automate much of the supply chain.
We're committed to our 4% topline growth and greater than 4% profit growth algorithm.
Our strategy and mid to long term financial plans support that despite the turbulence, we're managing through today.
Globally, we continued to build new mutually reinforcing businesses.
As we grow in areas like marketplace that leads to growth in fulfillment services and advertising income.
Our BDC relationships lead to complementary <unk> relationships, which strengthen our P&L.
The number of marketplace sellers, we have continues to grow and growth in Walmart connect and flip cart adds was strong for the quarter.
Walmart go local continues to add new partners for our delivery platform and we've now reached more than 600 delivery points in the U S.
We recently increased the Walmart plus benefit for fuel to up to 10 cents and expanded the number of participating fuel locations to more than 14000, including Exxon and Mobil stations.
Our health and wellness work continues in the U S. We announced an expansion of Walmart health into Florida with the opening of four new locations and more and more on the way.
In India, the launch of flip Cart health plus following our acquisition of online pharmacy platform sauce to Sundar Dot com is enabling us to increase access to affordable care in that country.
The team recently launched the flip cart health, plus App, which is available on low bandwidth. So it's usable for more people and more cities.
And in Canada, we're growing our number of primary care clinics to 87 and in partnership with Telus Health will launch digital pharmacy services.
We're also making progress with financial services in India phone pay recently processed more than 100 million transactions in a single day.
With annualized total payment value of about $770 billion, it's one of the fastest growing businesses in this space.
I also like what we're doing in Mexico, with our digital wallet Kashi.
In the U S through our JV with group of capital, we completed the acquisitions of two Fintech businesses, one finance and even and combine those businesses under the one brand around the world. We can help our customers and members transact seamlessly digitally and help them strengthen their lives financially.
Now I'll briefly comment on each segment before Brett adds additional detail.
In Walmart U S. Our sales performance was ahead of plan and we continued to gain share in grocery.
Inflation is lifting the average ticket and our transaction count in stores went up slightly versus last year.
Overall basket size is up as you would expect that units per basket are down a bit.
Price leadership is especially important right now and one stop shopping becomes more than just convenience when people are paying over $4 a gallon for fuel.
Overall e-commerce growth increased about 1% for the quarter.
We're making progress on the E. Commerce experience is in stock improves and the team continues to improve on the App and site experience and delivery accuracy and speed.
Our E Commerce operations were affected early in the quarter as we lost one of our largest fulfillment centers to a fire, which created some cost and efficiencies for us.
The buildings were destroyed, but thankfully and most importantly, no one was hurt.
The loss did put strain on our system. However.
The team quickly reacted to utilize our stores and spread volume to our other Fcs to fulfill ecommerce orders.
I'm proud of the team for moving so quickly to keep orders flowing to our customers.
Moving to Sam's Club U S. We continued to drive strong comp sales on a one and two year basis with strength across most categories.
Actions were up in Q1 overall membership count continued to grow plus member penetration reached another all time high and we saw good growth in ecommerce.
Profitability was negatively affected by the areas I mentioned earlier.
Walmart International continues to build on the momentum from last year with strong comp sales across markets and strong growth in E Commerce.
I visited our teams in stores in Mexico, and Canada since the first of the year the progress they're making on building out our firewall capabilities is impressive from financial services and healthcare that I mentioned earlier to marketplace expansion and advertising. The teams are moving quickly.
Also like the example from Mexico, where we have a 200 pesos per month unlimited Internet option. It is helping customers access the benefits of the digital economy that would otherwise cost them three times that price.
In summary around the world, we're still living in environments with Covid, President and navigating the economic and other impacts to deliver for customers and members.
As always our associates are doing a great job and we're grateful to them.
We continue to change and strengthen our company and position it for a strong future.
Thank you for your interest in our company, we hope to see you at our annual associate and shareholder celebration in a couple of weeks.
As I turn it over to Brett I want to pause and say a big thank you to him.
Bret made significant contributions to our company in all parts of our business for many years.
He has represented our associates, our investors and our company so well.
His knowledge astute judgment and character have made them a pleasure to work with.
Thank you partner.
With that I give you Mr. Biggs.
Thanks, Doug and the first quarter, we face some new challenges as well as some that were more pervasive than anticipated.
Of course, we've been in a very fluid environment for more than two years and I'm proud of the way. The company has performed during that time.
Q1 sales were strong across all segments and the strength has continued and the start of Q2, reinforcing Walmart wins with customers and even the most unique environments.
The first quarter was one of the most challenging periods yet related to supply chain disruptions increased cost and persistently high inflation.
There are some things that were unique to the first quarter like some labor scheduling inefficiency as U S associates return more quickly than expected from COVID-19 leave and some things that will likely be more persistent than anticipated when we gave guidance to start the year.
As Doug mentioned during the quarter, particularly in the middle of the quarter, we werent able to fully addressed or pass along some of the cost increases that impacted profit more than expected.
We're now managing those costs and passing them along more effectively.
The costs related to inventory and fuel prices in the U S will strike some into Q2, but the scheduling related costs have been mitigated most of the increased inventory and related costs were related to buying over the past several quarters with a keen focus on in stock and now we're in a short period of right sizing it.
The current sales strength and warmer weather in the U S give us confidence in our ability to work through this fairly quickly and strategically.
Our market position is strong and our business model was built to weather times like this when customers are making more real time choices.
Are there for them and we will continue to provide great value, while managing the business in a way that's also good for shareholders.
We will continue to reduce costs, where we can and manage pricing in a way that preserves competitive price gaps, while managing the bottom line and passing on costs, where they appear to be less temporary in nature.
Our expectations for the top and Bottomline growth algorithm remains structurally unchanged as we navigate the current environment. We continue to make great progress building, our flywheel and executing our long term strategy.
For example, the global advertising business grew over 30% in Q1 I am excited about what is ahead and what it means for customers as we more actively engage with them in different areas of their lives and deepen those relationships.
Now, let's get into some additional Q1 details as a reminder, my comments today will exclude the effect of last year's international divestitures.
We delivered strong topline results in the first quarter with total constant currency revenue of more than 6%, reflecting healthy growth in each segment.
Walmart U S gain grocery market share and at higher average ticket. Despite lapping last year's significant benefits from U S stimulus.
International was led by Mexico, and Canada, While Sams Club U S delivered the ninth consecutive quarter of double digit comp growth, excluding fuel and tobacco.
First quarter gross margin rate decreased 89 basis points versus last year due in part to pressures Sam's club from supply chain costs fuel mix inflation of markdowns caused by inventory delays.
Walmart U S. Gross margin rate was down 38 basis points with more than three quarters of the decline related to higher than expected supply chain fuel and ecommerce fulfillment costs.
We did see some supply chain improvement early in the quarter, the warrant Ukraine and ongoing COVID-19 impacts in various parts of the world, including China led to increased challenges.
While sales were ahead of plan in Q1, the category mix in the U S was heavier in food and consumables are spending shifted somewhat away from more discretionary items included categories impacted by unseasonably cool weather, such as apparel patio furniture and landscaping supplies.
We remain very bullish on our food and consumables business.
Consumers are feeling inflation pressures as evidenced by an increase in grocery private brand penetration.
The category mix shift along with increased inventories some of which was delayed and arriving led to higher than normal markdowns for general merchandise in Q1 unexpected markdowns pressured Walmart U S gross profit by about $100 million.
We expect the inventory position to improve as we go through Q2.
SG&A expenses de leveraged 39 basis points, primarily due to increased U S wage cost, partially offset by lower total COVID-19 costs versus last year.
We expected higher labor costs at Walmart U S. Due to the hourly associate wage increase announced last year.
As mentioned Q1 profit declined more than expected with operating income down, 20% and adjusted EPS down 20% to $1 30.
Operating cash flow was also lower than expected at negative $3 8 billion. This is due to several factors, including higher inventory amounts with about half of the increase due to inflation lower operating income and the timing of certain payments and payables due to inventory delays.
Given our confidence in selling through the inventory I feel confident about operating cash flow getting back on track as we go through the year.
Now, let's discuss segment results Walmart U S comp sales, excluding fuel grew 3% and were up 9% onto your stack, reflecting strong food sales, which were up low double digits as.
As mentioned previously general merchandise sales were softer, but still increased high single digits on a two year stack.
Transactions were flat versus last year, while average ticket increased 3%.
E Commerce sales grew 1% against strong gains last year as customers continue returning to stores.
We're making strong progress in many of our newer higher margin initiatives. The Walmart connect advertising business continues to scale as we expand self serve capabilities and offerings, our new data monetization business Walmart laminate continues to accelerate with over 75% growth quarter over quarter as more supplier partners collaborate with merchandise.
<unk> to utilize new customer insights and a platform.
We also continued to expand our Walmart go local delivery as a service business with new partnerships announced during Q1.
In addition, we held grand openings of four new Walmart health centers of Florida and will open. Another one next month as we continue to expand access to affordable quality care.
One our strategic Fintech partnership with River capital closed on the one finance it even transactions, which sets the foundation for growth collectively these initiatives represent large revenue and profit opportunities over the next several years.
Gross margin pressure and expense deleverage led to a decline in operating income of about 18%.
Inventory increased about 33% due to inflation and aggressive inventory buys over the past few quarters.
International sales were strong up 8% in constant currency with Mexico, and Canada, leading the way.
E Commerce sales in constant currency grew 22% on top of strong gains last year with growth of 86% on a two year stack comp.
Comp sales in Mexico increased 9% with strong growth in stores as well as ecommerce sales, which grew nearly 20% in Q1 and 185% onto your stack.
And Canada comp sales were up seven 7%, while in China growth was slower than expected, but comps still increased more than 4% led by e-commerce growth of nearly 90%.
Flip cart had another good sales quarter with solid trends in monthly active customers and users.
We're also pleased with the strong growth of phone pay with annualized <unk> of over $750 billion as the team continues to launch new customer offers such as the recent expansion of insurance offerings to include health auto and ATV coverage.
International operating income at constant currency declined nearly 13% primarily due to lower gross profit in China, reflecting increased markdowns and higher e-commerce penetration during the quarter as well as investments in e-commerce across the portfolio.
Sams club had another strong sales quarter with comp sales up 10, 6%, excluding fuel and tobacco and increase of about 21% on a two year stack.
Transactions increased 10% and ticket was slightly positive.
E Commerce sales grew 22%.
Membership income was up 10, 5% with another record of member counts.
Operating income was down 20% of the gross margin pressure I mentioned previously was partially offset by higher membership income fuel profit and expense leverage.
Now, let's turn to guidance, which will be discussed ex divestitures.
While we don't typically update guidance at the end of Q1, we felt that was appropriate given the current environment and the profit Miss in Q1.
We're behind for the year, but we're also just one quarter into the year with time and options in front of US. The team's focus is still on the original profit guidance.
Based on our continuing strong top line, we feel good about our ability to deliver full year sales growth in excess of our original guidance. We now expect consolidated net sales growth, excluding divestitures to be 4.5% to 5%.
We expect Walmart U S comp sales growth of about three 5% for the year versus the original guidance of slightly above 3%.
However, as a result of the higher than anticipated costs, we saw in Q1 and the expectation of some of that to continue.
Growing operating income at our original guidance of more than sales growth is challenging.
We now expect operating income and EPS to be relatively flat year on year.
As is our usual practice, we will update you on our progress as we finished Q2.
For Q2, we expect net sales growth of over 5%, including comp sales growth of four to five per cent for Walmart U S.
As our confidence builds on our ability to manage cost increases more efficiently operating income and EPS are expected to be flat to slightly up.
In closing I'm pleased with the top line momentum were seeing across the business. While Q1 profit was lower than expected during this dynamic and challenging environment I'm proud of how our teams continue to be laser focused on serving customers and taking care of shareholders.
Now we'd be happy to open up the call for your questions.
Thank you.
At this time, we will now be conducting a question and answer session.
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One moment, please so we pull for questions.
Thank you and our first question is from the line of Simeon Gutman with Morgan Stanley . Please proceed with your question.
Good morning, everyone.
One question and one follow up my first question is on the health of the consumer I'm curious what your assessment is if the consumer is getting marginally weaker staying about the same that you mentioned there were some mix shifts in your quarter, but you also said that.
Adjusting pricing and you raised your sales guidance. So it would seem that maybe the consumer isn't getting weaker.
<unk>.
Hey, Simeon this is Doug John and Brent May want to add some color too I think it's important to recognize that there's more than one consumer and we serve the whole.
Country I assume youre talking about the U S. In particular, so we've got a breadth of customers and they behave differently as we said in our pre recorded remarks for some customers. We are seeing some indications of change throughout the quarter, but that's not true for all of them.
Morning, It's John just to reiterate what Doug said, we do serve a wide range of customers and certainly have seen.
Strength in the consumer.
We see growth in high ticket items like game consoles recently with warmer weather strength in patio furniture, grills gardening and hard lines, but we do see some consumers switching we see categories like daily lunch meat Bacon dairy, where we see customers trading from brands to private brands. So we.
Both of those things happening at the same time, but as we reported strong topline results. We see we see a wide range of consumer behavior.
And maybe the follow up regarding the guidance change in what happened in Q1 in Q4.
The business created this perception that it was being managed pretty agile you were able to adapt to higher costs and you raise price.
Was it in the first quarter that costs were up two quick or that you were hesitant to move price to the degree that you did in the fourth quarter. It was just such a divergence from how you manage Q4 to Q1, albeit not that you manage it that finely every quarter. So that's what created the surprise I think to us and.
The profit and the profit Miss yes.
Yes, I mean, it's more about the speed than it is the other issue things move quickly in the back half of the quarter and as you mentioned, sometimes creates a timing issue. So life doesn't begin and end with the quarter dates beginning in and we will we will manage this as we go through the year, but the <unk>.
Mindset and the ability to management haven't changed.
Thank you.
So let me address questions from as many participants as possible. We ask you. Please limit yourself to one question.
The next question will be coming from the line of Karen short with Barclays.
Hi, Thanks, very much I wanted to just ask a little bit about the <unk>.
Inventory and I ask in the context of how much is fully factored in.
Kmart further weakens and therefore in that context, how much ability going forward do you have some flex in the P&L.
Back to manage I guess, the P&L with respect to further markdowns gross margin in the U S.
Given your high levels of inventory, but also contemplating the risk of further SG&A deleverage. If there is more weekend with the consumer.
Sure Hey, Karen it's John .
The first is just reiterate strong topline in the in the first quarter and then our guidance on topline them would reflect.
Our confidence that there'll be strengthen the top line as you look at what happened in Q1, specifically, we did take on more inventory, but we've seen strength as of recently and general merchandise given the warmer weather we have a large number of rollbacks that are present right now and the customer is responding to both very well as I said we have.
And high ticket items like durables and hard lines and then we do see some switching on inventory in particularly we are up about 33% in the vast majority of that increase is a reflection of both inflation and inventory positioning that improves availability quarter to quarter, which we're happy with and then we have some inventory of the remaining portion of the increase.
That will have to work through and sell through over the next couple of quarters.
Curious Brad I feel good about the timeliness of how we're handling inventory with rollbacks.
The way, we're looking at pricing as we said in our prepared remarks, I think over the next quarter or two we will work our way through this but I feel good about the way, we're we're going to manage through this.
Our next question comes from the line of Bob <unk> with Guggenheim. Please proceed with your question Hey.
Hey, good morning, Brett.
Congratulations to Michelle Thanks for everything.
On my question would be.
Can you talk about just conversations with your vendors given their strong results are you leaning in more on negotiations can you just sort of help us understand your mindset at this point thanks.
Hey, Bob I'll take it it's John .
And as we said.
We definitely have seen an inventory increase a large portion of that was planned.
But certainly the way we feel about it given some of the switching and other things that I mentioned earlier that mentioned categories like Delhi, Lakshmi dairy Bacon, where we see switching our team and our suppliers need to do everything we can do to keep costs low so that we could have values for customers that are meaningful.
That's the purpose of the company, we're positioned to do well.
Great economies in economies that aren't as good so we're going to be positioning ourselves well to take care of our customers going forward and our teams and our suppliers, we both need to do more to help customers out.
Thanks, Bob I appreciate it. Thank you. Our next question is from the line of Steph Wissink with Jefferies.
Hi, Good morning, everyone. We have a follow up question.
What youre seeing or what you have seen throughout the course of the quarter.
Any material change in the consumer basket that you think is notable I know you called out mix shift towards grocery, but any signs that the consumer as the quarter progressed reacted differently than you expected. Thank you.
Yes, so in the past.
Good.
In the first quarter.
We definitely had an impact due to the offsetting of stimulus from last year, we had a very strong quarter last year, one of the strongest quarters. We've ever had so we expected an impact in general merchandise as we went into the quarter and we did see increased strengthening and food as the quarter went along and then late in the quarter and then to the beginning of the month of May we've seen strengthening in general merchandise I think it's a combination of a warmer.
Weather across the country and the response to the rollback. So we've put in place in terms of the consumer themselves.
Strong growth with higher income consumers middle income and lower income, but we do see.
Definite strength with high ticket items as I said with some consumers and others. We do see some switching which would include switching specifically from brands to private brands.
Thank you.
Your next question comes from the line of Greg <unk> with Evercore ISI.
Hi, Thanks, My question was really about what's driving the basket and working down the inventory. So that's one question, but I guess, if we look at this quarter or is there a way to say how much was inflation and mix. I think you mentioned units were down could you give us a number to that and then really on inventory.
Should we expect $100 million of markdowns in the next couple of quarters, how do we think about that cadence.
Hey, Greg on the basket first of all what we're seeing right now is an increase in traffic and ticket. We did see units per basket slightly lower in the first quarter, we think thats a combination of some of the switching that we mentioned earlier, but also the offset of stimulus from last year, we had significant strength in.
And categories that were affected by stimulus as.
As far as the inventory positioning.
Growth in the U S. Specifically about 33% as I said earlier the vast majority of that is inflation plus the improvements in availability that we have prepared for and intentionally purchase over over the last few quarters and then as I said there is a portion of the inventory that we will need the next quarter or two to work through.
Customers are responding very well to the rollbacks, we began those late in apparel in the third for the first quarter and then extended more rollbacks into the second and we're seeing a good response from both of those so we think that over the next quarter or two we'll sell through the remaining inventory the increase that we have on the books right now and.
You heard from Brent in the prepared remarks, we did raise guidance for the rest of the year on the topline.
Thank you. Our next question is coming from the line of Michael Lasser with UBS.
Good morning, Thanks, a lot for taking my question Brad Congratulations.
My question is the cost pressures that Walmart has been countered come on comes on the queue.
Amazon facing its own margin pressures.
And are these developments reflective of increased competition between Walmart and Amazon and does it suggest the cost of doing business is rising as the macro uncertainty increases.
As part of that question should we assume that if these are just reflective of timing differences that youll get all of these costs. The margin pressure is back in the first and second quarter of next year when you lap them. Thanks a lot.
Michael This is Doug.
It's more about market dynamics than it is relative to competition and I would expect to get these things back over time as.
As we mentioned earlier things moved quickly in the back half of the quarter and it just takes a little bit of time to adjust and as we mentioned in the prepared remarks, we're managing things at an item level from a pricing point of view, but below that gross margin line. There were costs related to fuel and then the staffing issue that we mentioned that they just need to.
<unk> resolved, but we see those as being isolated to the quarter.
Our next question comes from the line of Peter Benedict with Baird.
Hey, guys good morning, and congrats Brett.
So my question is just really on the profit guide for.
For the year coming down clearly first quarter and then some in the second is it right.
To view the second half profit guide largely intact here, just curious kind of what your view on the holidays.
Later this year has it changed at all and if you've adjusted any orders.
Accordingly, thank you.
Hey theaters, Brad appreciate it.
Yes.
When you look at the full year guidance the way I would describe it.
I mean, one quarter to quarter.
Okay.
Go out being known for same quarter to quarter margin is tough to predict.
But I feel I feel good about the guidance for the full year I think I mean, as you work down through the profit.
P&L statement there is a lot of variables there are more variables than typical because of what we're dealing with the external environment and you look at a range of outcomes of all of those variables when you add that up.
You get to a bottom line and that's what we felt for the for the full year, how that comes quarter to quarter is a little more challenging to see we gave guidance.
Guidance for the second quarter.
Obviously, that's a little closer in.
But for the year.
We feel good about the guidance and that kind of implies where we think we'll be in Q3 Q4 and as we always do as we come out of Q2, we will we will update you of how we see the world at that point.
Thank you.
Next question is coming from the line of Kate Mcshane with Goldman Sachs.
Hi, Good morning, Thanks for taking my question I, just wanted to ask about price gaps and grocery if youre still happy with where you are with regards to price gaps in light of the level of inflation and you mentioned trade down.
Private label, but just curious in terms of maybe trade down.
Okay.
Sorry, how are you have you been seeing new customers come into the store.
Hey, This is John let me take the first question.
On price gaps. This is of course something that we look at every week every day and our role with our customers to make sure that customers can find values on an everyday on everyday goods.
I think that my team specifically in our supply base, we need to do more to control costs to ensure that we can provide great values at retail.
Our customers I mentioned that group of categories.
<unk> and dairy, where we definitely see switching as we look at what's happening in the baskets. So.
We have some work to do in terms of ensuring that we're providing the right values and we're going to do that across the second quarter going into the rest of the year.
Thank you.
Is from the line of Christopher <unk> with Jpmorgan.
Thank you I had a follow up to that last question. So.
The price architecture across retail has been pretty rational and <unk>.
Much every category are you seeing any change from the traditional grocers in terms of maybe they are becoming more high low than they had been and then getting back to where they were pre COVID-19.
And.
Related to that you mentioned rollbacks and been an advocate for the consumer or the rollbacks focused and seasonal category, where the inventory is heavy or is there. Some rollbacks also.
On the consumable side of the business.
We've really seen strengthening and grocery over the weeks in the quarter the quarter strengthened on the topline later into the quarter and remained strong early in the month of May.
Favored by positioning we're happier with our inventory levels versus where we have been in previous quarters, and then with warmer weather we have seen a reaction from the consumer and the grocery categories in terms of the rollbacks, specifically, we position those over 10000, rollbacks and seasonal and general merchandise categories.
I mentioned earlier, the inventory level up 33%.
More than half that of the majority of that is not only inflation, but it is it is improvement in availability across the entire network and then there's a portion of the inventory that the rollbacks and other things that we have in place already will help us sell through over the next couple of quarters.
Our next question is from the line of Robbie <unk> with Bank of America.
Oh, Hey, good morning.
I wanted to ask just what you are seeing in the e-commerce outlook from here our people shifting back to stores, how should we think about that and I think you mentioned the global advertising business was up 30% how was that versus expectations and how should we think about that going forward as well.
Yes in terms of e-commerce.
We had about a 1% increase in the first quarter, which is similar to Q4 last year, we definitely had pull forward in growth over the last year or two given all the stimulus and changing consumer behavior.
Stores were strong in the first quarter, but what we're seeing so far in the month of May is strength in both channels. So it looks like the.
The growth is more evenly spread at least at least up to this point on advertising. We're pleased with the performance and the growth in the U S market on the Walmart connected team continue to make progress and grow our advertising business and we feel like that's an exciting part of what we're doing is one of our <unk>.
We stay focused on is the reshaping of the business and building a flywheel that will serve customers, but also help the company raise raise.
<unk>.
Raise raise income at levels that enable us to lower cost for our customers.
This is Catherine Sam's club I mean, we have been happy to see E com growth by 22%, which is a really nice blend of Pep side, which we launched 18 months ago, and as well as direct to Chaim and traffic really strong into the club at 10% So really not Linda.
<unk> shopping us across all channels.
Data from international similar trends across the international business really encouraged.
Some of it.
Common stocks that were seeing around the world. So all Max at 195% to yes.
China, 149% and Ken enjoyed 112 is that.
Similarly, we have same people coming back into our stores as well the team that keeping momentum in e-commerce from an AD tech perspective, and advertising revenue slip.
Leveraging a really nice jump here in building out that.
And supporting small cell as well as Nathan.
Nathan New revenue streams today saw some good growth year on year and that it would take a lot of learnings from that and that space as well.
Our next question comes from the line of Oliver Chen with Cowen.
Hi, Thank you in the prepared remarks, you called out timing strategy, a few times as we think about timing and managing the inflation relative to what you can do on the topline I would love to hear more about that in our model modeling.
Second just a bigger picture question on Walmart plus then the flywheel would love any updates there it looks like youre, making lots of great progress congrats spread as well. Thank you.
Thanks Oliver.
On timing Oliver.
Things that happened in the quarter that we did mention of course there was.
Inflation that came through the quarter.
In terms of cost of goods than there was the fuel cost charges that we mentioned and that came in a very fast rate.
In late February early March and then there was the pressure on wages that was really the month of February after the micro environment.
For the most part.
I feel good about the way we have those cost position for now of course that could change given how dynamic the market is.
And then on the entire flywheel plus is an important piece of the flywheel. When you look at the flywheel to step back we have the business. That's in stores, we have our e-commerce business, including our marketplace, we're making progress in healthcare and financial services with the acquisitions that we manage that we managed to complete and have another one banner and then plus.
Along with <unk>.
Walmart connect and data ventures are all important pieces of the flywheel really pleased with the progress. The team has made in terms of growing to pick up business and offering more slots for customers, becoming more flexible and our NPS scores are improving those categories and it's great to see the team make progress they've made.
Thank you. The next question is from the line of Rich <unk> with Oppenheimer.
Good morning, Thanks for taking my question. So I just wanted to ask on the Walmart U S. The inflation levels that you guys are seeing is there any way you can quantify the level of inflation youre seeing across both grocery and TM and at this point any signs that maybe some of the inflationary pressures are starting to peak.
Yes.
Jump in I think John you can add what you want but on the on the food side, we're seeing double digit inflation and our I am concerned that that inflation may continue to increase and then on the GM side, we may see that turn faster during the course of the year. So when you look at our inventory numbers I know part of what's driving the.
<unk>.
As we mentioned earlier is that food is just inflated. So we'll manage in stock well managed features and food and you think about the general merchandise side break that into apparel and hard lines.
Apparel.
We were appropriately aggressive as we started the year in terms of our inventory levels and as we mentioned before we can roll back prices in apparel as we have done and still be helpful. From a margin mix point of view and we'll work through that as we go through the second quarter and beyond if necessary, but the good news is we've got the summer in front of us and I'm not sure there.
These issues in March and April and have them later in the season and then on the hardline side.
Kind of the same thing we've got basic side counter in stock that needs to be strong and on the non basic goods that we feature.
We will manage those inventory levels take rollbacks in some cases.
To manage through the total and as.
The customer pays more for food <unk> behavior is something that we'll watch closely will not only watch the opening price point in pack size change on the food side for some customers to move to private brands, but will also watch what that means for the general merchandise business.
As Doug said I feel really good about the rollbacks and the rollback presentations, we've seen stores have been stores all over the country. The stores are excited about the robotics and customers responding the execution has been strong and.
As I mentioned with food inflation with the growth we've seen in the first quarter.
I am also concerned about about the rate at which prices have risen in the country and our team our supply base we.
We need to do more to keep costs, low and where we've seen the switching from brands to private brands will continue to watch that for a group of customers that we've got all work harder to keep prices low for the American consumer.
Our next question comes from the line of Michael Baker with D. A Davidson.
Yes, hi, perfect segue into my question just following up on that.
Just some countervailing things that I'm hearing and I guess is that there are a lot of different product categories, but youre talking about keeping prices low enroll rolling back and that's really I think always been your mission and inflation environment is to make sure. The consumer can still afford basic needs. But then you also were talking about.
Alright. Thank.
Think you were saying taking more price increases as we go ahead.
Catching up on some of the timing on some price increases so.
Can you help square those countervailing wins, if you would.
Thanks.
Yes happy to talk more about that.
When things like cost of goods increase and we make they make a decision with our supply base that that's appropriate and those types of increases do flow through retail pricing, but there were some things in the first quarter that happened very quickly we mentioned the labor after the omicron very we had a significant number of people.
Come back, where we had been over scheduling and Overstaffing due to leaves all came back at the same time the fuel increase that happened. So quickly at the end of February early March.
Those kinds of things along with we mentioned charges in supply chain that we had this fire, which our team did a wonderful job keeping associates safe and getting them out of the building, but we lost those centers. Those are costs that came in very quickly that we feel are more isolated in the first quarter and some of those cost did not flow through because we believe they were they were.
Short term in nature, So we will continue to.
To flow, what we need to flow at the right timing, but Brett said something earlier this really important it's very difficult in an environment that has so many diamond changes to manage the margins quarter to quarter over the longer term. Our team is very capable of managing this quarters and we've done that for a long time, but not all the costs and changes happen windows.
The quarter began some windows quarter ends.
More fun and interesting parts of retail is the management of margin and blending the portfolio of items and I.
Remember one of my first buying responsibilities within food and a leader in our area.
Talk to us, it's quite a long time ago about.
Profit for the month or profit for the quarter and that we needed to raise profitability and so we asked the buyers I was one of them to come back with a plan on what prices, we were going to reduce by the end of the day.
<unk>.
Pause for a second and that we're going to raise profit by reducing prices because that was pretty new a rookie.
But it's really cold and go back and look at which items, maybe elastic that have above average margins bring those prices down to mix yourself up so part of what's at play here is you've got food inflation moving up but we've got general merchandise categories like apparel and some of our hard lines categories to play with and the beauty of it is customers are even more.
Price sensitive right now they are paying close attention fuel prices are high so the prices are high and so when you bring something down and sporting goods or hardware. When these other categories. They notice even more than they would notice before and that makes.
The elasticity.
Impact be different than it would be otherwise, which blends the mix up.
Well basically you end up with a bunch of buyers their portfolio managers.
Our next question coming from the line of Robert Moskow Credit Suisse.
Hi, Thanks, as a follow up to that anecdote.
Isn't that also saying that really there is not much you need to do on food prices that.
The consumer seems to be absorbing those higher food prices very well.
Shifting more of their spending to food instead of Gen merch.
How aggressive do you think you really need to be on food pricing and private label.
In this environment. It sounds like you want to focus more on the pricing in general March.
Well manage both main price gaps that are and we know where to put our price gaps to grow profitable growth. So we will manage both actively.
And we do want customers to have lower price some food and we want to we want to sell more general merchandise and so we'll partner with the suppliers on the food and consumable side to try and bring those costs down the lead times in general merchandise categories are longer so Peter asked earlier about the fourth quarter, obviously, we're thinking about units back category right now.
But as we make those unit decisions. Many of those were inflated in some way senior managing dollars at the same time, you're managing units to get an outcome.
We'll actively manage both sides of it and.
We want to ensure that we don't.
Managed the customer message as an average we serve a lot of customers and different customers are in different places and we want to be thoughtful about customers all across the country and in different geographies, ensuring that all customers can get the value that expect from shopping with Walmart not all of them can't afford to absorb this and they need our help and so.
We do as we mentioned earlier stay focused on opening price point food items, although for Brad a gallon of milk in Canada to Mac and cheese protein categories are we helping a family that's at the lower end of the income scale be able to afford to feed their families. During this inflationary time and given that the stimulus checks happened last year there was some.
Fit to some of those folks that is eroding overtime and as we look at the rest of the year, that's something thats on our mind.
Our next question is from the line of Chuck Grom with Gordon Haskett.
Hey, guys Congrats again.
Just on the.
On the digital side up 1% you talked about some capacity issues can you talk about that plus a little bit.
How we should think about the trajectory of digital sales over the next couple of quarters.
Hey, Chuck it's Jon good morning.
As we said the growth rate Q1 was 1% same as the fourth quarter.
As far as capacity what happened in Indianapolis was tougher for the team to go through our team did a great job of keeping people safe everyone was out of the building in less than five minutes, but the building was was a loss. It was a large fulfillment center in our network.
The positive out of that is we have a lot of stores and we have other fulfillment centers and within about 72 hours.
Team was able to reroute the majority of the orders into other places in the country. There was certainly some logistics costs with doing so.
It was a such a big center, but they moved relatively quickly there was some top top line impact as you can imagine in each of these centers, particularly with with our assortment, including our fulfillment services. There are unique items that are in each of those facilities and as Doug said, just like our lead times are longer general merchandise or that of our suppliers and our sellers.
So there is some impact there but.
Looking at the business most recently as we talked about with Walmart connect in other parts of commerce.
We ended the second quarter early signs of May are given some of the increases in temperature of the seasonal categories have really taken off and that would include Walmart dot com and our ecommerce business.
Our next question coming from the line of Paul Lajoie with Citi.
Hey, Thanks, guys, you mentioned less gross margin pressure in <unk> versus <unk> I believe I'm curious if you would expect that sequential improvement to continue in each quarter for the remainder of the year and related to that I'm. Just curious what sort of impact did you see from your higher margin growth businesses. This quarter and do you expect.
Those businesses to have a more material positive impact as we move through the year. Thanks.
I think our margins in Q2 versus one and we still have this issue where we've got to make sure. We're doing everything we can with our suppliers to manage our costs. So that we can keep food pricing in a great spot for consumers, we think about our price gaps every day, we talk about it every day.
Every week and we manage those carefully.
But what we need to do is work together with our supply base in categories like we mentioned in proteins and dairy where we see some switching from brands to private brands and we see switching from gallons of milk to <unk> said. This morning, we've got to do it we can in those categories to keep costs low I think the biggest issue as it relates to.
Gross margin Q2 through Q4 will be mix.
And we didn't have.
Favorable weather in the first quarter.
As the temperatures warmed up we saw stronger sales in GM apparel included and so one of the reasons why we mentioned that Q2 looks like it'll have less pressures that we think that mix will be different in Q2 than it was in Q1.
Our next question from <unk>.
Line of Ben Bienvenu with Stephens.
Hey, Thanks, Good morning, I'll add my congratulations thanks for everything for the years.
Thanks, Brent I wanted to ask with the start to TQ, where do you feel like you have the best handle on the business. What are the biggest challenges you are still seeing and.
And then you noted.
For the remainder of the year is to get back to your original guidance going.
Turning to achieve that goal how do you think you're most likely to do that.
Let's go back to Paul for just a second I think we missed the second half of this question and will come back.
It's about the higher margin growth businesses like Walmart connect and whether we expect those to continue to grow we shared that Q1 was up about 30%.
Ancillary businesses in the U S and around the world.
<unk> are growing and we expect that to continue and we're excited about that.
Frankly, when I look at the Q1 results I understand the response to a miss.
Hope that some of the underlying improvement that's happening in the shaping thats taken place with the business model is it totally lost on people.
Think thats going to continue and it will result in a company that's that's more resilient and more diversified on the bottom line.
And on the mix as far as where we are now really good improvements since late in the Q in Q1, we mentioned the rollbacks in apparel those are high margin businesses that are accretive to the total so the rollbacks there with robotics, they still help the business in terms of sales and margin.
And then really really pleased with with the results in commerce in stores regarding seasonal merchandise and what we're seeing as we get into the second quarter now that we've got some warmer weather.
It looks really strong from from our view.
Then you asked about the comment I made the comment about being focused still on our original guidance and I think thats.
That's a statement to what I see inside the company, what Ive always known the company would be high sense of urgency.
Really smart people able to work on any kind of challenge we've seen that over the last two two and half years I think we've managed incredibly well.
Last two and a half years so.
We're still focused on what we what we said at the first of the year, but felt it appropriate to reduce the guidance officially based on the first quarter, but it's just one quarter into the year.
And Theres still a lot of levers to pull so thats why I made that comment.
Our next question comes from the line of Scott <unk> with <unk> Securities.
Yes.
Good morning, guys. So the last time, we saw consumer weakness in greater private label concentration, it's starting to become self fulfilling meaning consumers are focused on private label and can you provide more shelf space to private label, which drove our private label sales so on and so forth. So when you look at today's environment and the price increases vendors theyre trying to pass on should we expect private.
<unk> mix to continue to increase in the coming quarters.
Yes, I wouldn't want to see us adjust shelf allocation. Much. This is more about just staying in stock and letting the customer decide yes.
Exactly the same way, we serve a broad range of consumers and and we serve a different places that we serve customers in the store and we serve them at the curb it pickup we serve them in their home in their refrigerator and and we delivered drag so.
I think we just have such a broad range of offering that we can serve all consumer as well and if customers buy award one item more than the other we will replenish it that way.
But I see us staying in position to be able to serve a wide range of consumers.
Thank you.
At this time, we've reached the end of our question and answer session and I will turn the call back to Dan Mcmillan for closing remarks.
This is Doug Mcmillon, there are a lot of dan's around here.
No problem I'll start by thanking Brett and Brad has done an outstanding job for a lot of years all over the company. He's been a great partner not just to me, but to all of us.
His judgment as characters knowledge of the company just who he is as a person and it's a great accomplishment to become the CFO of Walmart and you've done a great job and we're going to Miss you.
I wish we had gone out on a great quarter.
So Brian as you in that way. So that you can you can chime in from the cheap seats when things get better.
Speaking of things getting better we're motivated to have a really strong year.
Understanding the environment trying to convey to you all what we see going forward.
But we expect customers and members to come our way, we're going to keep growing overall, we're going to keep growing our share and we're going to change the business model the company to be more profitable and there were some things that happened during the quarter that were different than what we expected and we're trying to be very transparent about those things and then with performance earn your trust and just keep.
Moving forward and make this is isolated to the initiatives. We can there is a lot of uncertainty looking forward things are very fluid I know you. All are gathering information every day and so are we and as I talk to people across the country and across the world there seems to be more uncertainty now.
In a very fluid environment and so we'll just we'll deal with that and we like the hand that we've got to play.
We've got a great set of assets, we've got a great set of people and when things are more difficult, we should outperform and so our first quarter performance is a disappointment to us and we're going to put it behind us and have a strong year looking forward to seeing you in person those of you that can make it to the meeting on June 3rd will be down in Fayetteville, and we're going to have a bunch of associates.
Get back to.
Pandemic type week, which we're all excited about and we hope to see you there. Thank you all.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
Okay.
Yes.
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